“I’m going to wait until market conditions improve beore I invest…”
Market timing is a strategy where an investor attempts to predict the future direction of the marketand then move in and out of the market accordingly. This is one of the most dangerous strategiesANY investor can employ.There are essentially two reasons why market timing is so dangerous:Over the short term, the market does not always move logically or predictably. This makes
it nearly impossible to time the market. Simply put, it can’t be done.Even if you were able to beat the odds and create a system that accurately times the mar
ket, the payoff would not be worth taking that level of risk.Investors who attempt to time the market are at risk of missing periods of exceptional returns. This
can have a large negative impact on an otherwise well planned investment strategy.
Suppose for a moment your timing strategy was slightly off and you missed out on just 30 days of strong performance each year. The result would be disastrous to your overall return. The graphbelow illustrates the effect of missing the one best month in a calendar year for the period of 1995- 2007.We should note that although we feel timing the market is an impossible strategy, we have proventhat there are inefciencies in the market that allows investors to accurately identify individualstocks that are poised to outperform (or underperform) the overall market. After years of quantita
tive research, Zacks has discovered that the most reliable and accurate predictor of future stock
price movement are earnings estimate revisions.
Sin #1: Market Timing